Coupon rate starts very high: much higher than the borrowing rate for the issuer.
There’s a formula for resetting the coupon rate periodically.
The rate can remain the same or decrease at a reset date; it cannot increase.
Whenever the coupon is reset lower, the bondholder has an option to put the bond at par.
You can think of the reset as a sort of call option: the issuer calls the existing bond and replaces it with another callable bond that has a lower coupon rate, and the same maturity as the existing bond.
I think it is the term ratchet that makes it confusing. The term callable, for instance, implies that it can be called. So what is a ratchet?
It is a mechanical tool that allows movement in one direction but not the other, so it is used to tighten ropes, bolts, nuts etc. Here’s is a ratchet used for strapping.
In corporate finance we also see a ratchet clause which allows target company management to increase its equity if they meet performance targets, but they don’t get penalized for otherwise.
What benefit does the investor get at putting it back at par? I assume he cannot reinvest it elsewhere at higher rates if the market rate of the coupon has fallen? Therefore when the rate falls what question does the bondholder ask himself? I either keep receiving lower coupon payments or I take my money back and search for a different investment that yields higher returns?